Disadvantages of SIP

A few years back ULIPs were market’s favorite investment option. Everyone wanted to invest in ULIPs and ULIPs for income tax (IT) savings were quite popular. All financial experts used to recommend it and agents used to call unsolicited, selling ULIPs like hotcakes. They sold ULIPS in one city while sitting in another, using phone to communicate and courier to send and receive documents. Even I got a call from a salesperson selling Reliance Life plans and her promise was: you deposit Rs 30K for 3 years and at the end of the period, you will get back Rs 1.2L; apart from saving taxes! That was a very good return and I was anyway looking to invest some amount for tax-saving purpose, so I subscribed to the plan. When I received the document, the company had clearly mentioned that I could return back the policy/plan within 10 days if I didn’t like it after going through the detailed terms and conditions. I wanted to take a chance, so I went ahead. And today after 3 years, the net market value is no more than half the principle.

The problem with ULIP was that there was a large initial allocation to economically wasteful accounts (for the investor), like to the broker, the agent, etc. Did the financial experts tell us about it? No. But by the time investors found out the hidden truth about ULIPs, the financial experts too became prudent and started speaking against ULIPs. Thanks to the government intervention which has taken the shine off from ULIPs. But till the time investors didn’t know about it, no financial expert thought it his or her duty to tell the fact in the open.

And now, is it happening the same with the SIP?

SIP, or the systematic investment plan, is being touted today as the best investment option. The logic is simple: since market goes up and down, it is safer to invest in small amounts over the long term rather than in bulk at one go. SIP has less risk, as they say. But the question is: will SIP give me higher returns? (Higher than other options available to me?)

If SIP avoids the high risk associated with lump sum investment, doesn’t it also avoid the opportunity along with? For example if I know that the market would move between 16000 and 19000 and the market currently is at 16500. I would like to invest more at this point of time. 2 months afterwards when the market is at 19200, I would know that I am at the top of the curve and would like to sell and book profits and I won’t like to invest more. But through SIP, you would be forced to invest even at these high rates! And after one more month if the market comes down to 18000, all the profits you made while investing at lesser rate gets wiped out and adjusted by the losses made by investing at the time when the rates were high. Anything that is equity linked runs an exact risk like this in the long term. I don’t see the point in making 20K profit for the first 6 months of the year and then making 15K loss in the next.

If market keeps growing, say for a period of 2 years, you shall make less money through SIP than through lump sum investment. Also, SIP doesn’t take our financial wisdom into account. If the market is too low, I would like to invest more. If the market is too high, I would like to invest less or none. But in SIP, you keep investing whether the market is high or low; it doesn’t give you the flexibility which could have been more financially rewarding for you.

I think SIP is good for the finance and share marketing companies. It gives them a constant business, de-risking them from the ups and downs in the market. Even when the market is at sky’s top and everyone knows it will come down, there will be people putting money in, thanks to the SIP plans. SIP makes sure that the brokers and finance companies never get out of fashion. Also, the fixed elements of the cost when users place orders, like stamp duty or brokerage etc, would be higher if we place 100 small orders, when compared to place one big order.

I think SIPs are not the best investment option available to us. It may be a structured and disciplined way to invest, but I think when it comes to money and finances, flexibility helps and a straight line rigid method harms our chances (of making more money). For a lot of investors RDs and FDs are still better option due to risk free growth and for those who can take up some risk, lump sum investment gives much better returns. SIP in my opinion needs better evaluation from the investor’s point of view while for the brokers and financial advisors, SIP would remain the best recommended option because of their own self interests. We need more number of honest evaluations to come out in the open whether SIPs are really the best option for the investors, or if these have been tagged so for milking more money out of investors, just like ULIPs.

- Rahul

Note: The views expressed are entirely personal and don’t express the views of any person or organization associated with the author. The author has taken care to maintain the facts mentioned in the article to be true, but there can be non-deliberate errors and mistakes.